Real estate investment is a good way to earn higher returns with minimum risk of loss as well as to diversify your portfolio. However, as an investor in real estate, you may have often come across the term “hard money” when talking to a dealer, or a realtor, but have no idea what it is. Therefore, we are providing a comprehensive guide to help you out.
What they are
Hard money loan is a term used to define the loans that you may be able to get, or give, based on the property itself, not on the credit rating or score of the borrower. These are usually funded by a group of private investors, with the typical loan term being 12 months, although they may go up to 5 years in some cases. The monthly instalment consists only of interest, with a balloon payment at the end of the loan term for the principal.
Types of properties
The good thing about these hard money loans is that they can be attained for any type of property. Whether you have a residential piece of property, commercial plots or building, or industrial estate, a loan can be obtained for any type of them. However, you may have to look for a hard money lender who specializes in the particular types available.
People in immediate need of money usually opt for such quick loans. These loans allow the funds to be obtained within a couple of days and help cut through the red tape common among regular loans. Similarly, people with a bad credit history or a low credit score may opt to borrow from this source, as this may be the only way these people are able to fulfil this need. However, lenders must always make sure the borrower is legitimate and run a background check on him to ensure the entity is a legal money lender in Singapore.
High risk, high cost
While hard money loans seem ideal for any borrower, there is definitely a downside to them. Borrowers, due to the higher level of risk, will have to pay a higher interest rate on these loans than regular ones. These loans may be as much as 10 percent higher. Lenders often exploit borrowers in such cases, as they are aware of the limited options for the borrowers. Moreover, these loans also have a much higher origination fee.
While these loans can have a maximum duration of 5 years, an alternative to these loans are mortgages which have much simpler terms, lower interest rates and a greater time period, commonly between 15 to 30 years. Moreover, this type of loan has a higher risk of property loss. The collateral or rather the guarantor of the loan is the property, resulting in a higher risk of losing your property if you are unable to pay it off.
Hard money loans can be a very good option if you’re looking for funding immediately and will be able to pay it back in a few months. However, keep in mind the higher costs of this choice.